New Rate Ceilings Make Arms Safer, Savings League Finds

The typical adjustable-rate mortgage (ARM) offered to home buyers is safer to the consumer than the ARMs of a year ago, according to a study released Monday by the U.S. League of Savings Institutions.

About 97.5 percent of all ARMs now being offered contain a lifetime

``cap`` or ceiling on how high the mortgage`s interest rate can go. That is up from 93.5 percent in a 1984 study, according to a nationwide survey of 1,100 savings and loan associations and savings banks.

Nearly 96 percent of ARMs offered lifetime caps of 5 percentage points or less above current rates, up from 90.3 percent last year, the league said.

More than half of the ARMs being issued this year involve stricter underwriting standards than fixed-rate loans, up from less than a third a year ago, the league said.

Its study showed that 86.8 percent of the ARMs issued by savings institutions restrict borrowers` monthly housing expenses to 28 percent of their gross monthly income. That compared with 53.8 percent of fixed-rate mortgages.

As might be expected, the mortgage default rate for ARMs trails that of fixed-rate mortgages. Only about 1.3 percent of ARMS were 60 days or more past due in May, when the study was conducted, compared with 1.9 percent of fixed- rate loans.

ARMs currently account for more than half of the nation`s mortgage lending, with average interest rates of slightly more than 11 1/2 percent, compared with average rates of roughly 12 1/2 percent for fixed-rate loans.

Of Chicago-area savings institutions, 97 percent in the survey said they screen prospective borrowers using underwriting standards stricter than or as stringent as those used on fixed-rate lending, with 93.3 percent demanding payment-to-income ratios of 28 percent or less.